So the worst has happened. You received a notice from the IRS and one of your returns is being audited. It can feel wildly random and unfair. You filed on time and you paid what you owed yet here you are, holding that letter saying you’ve got some explaining to do. Before you have a meltdown, do these five things instead.
Before we dive in, note that this post applies to folks in the U.S. only.
After the initial wave of shock passes, sit down and take some deep breaths. Just because you’ve received an audit notice doesn’t automatically mean you're in trouble. It simply means the IRS wants to take a deeper look at your tax returns because something raised a red flag. Chances are, once you’ve gone through the auditing process, your tax liability won’t change—but if it does, the IRS is surprisingly flexible in helping you resolve this issue. (As a reminder, nothing in this post should be considered legal, tax, or financial advice. Always consult an expert... which we'll mention in a second.)
Don’t Ignore It
You need to respond to your audit notice—quickly. Ignoring the notice won’t solve the problem and can in fact make it much worse. The IRS is crystal clear on deadlines, and if you miss them you can kiss your deductions good-bye. Yep, the IRS will eliminate ALL of your deductions if you keep missing deadlines and your tax liability will shoot up thanks to interest and penalties. Don’t get off on the wrong foot by being late in your responses.
If you don’t already have a tax professional, hire one immediately. If you already have a CPA or tax professional, get in touch with them right away. Most will assist you in the auditing process. While it can be tempting to handle it yourself, don’t. Sometimes you’ll just end up calling attention to areas the IRS isn’t concerned with and making an even bigger mess for yourself. Audits are serious business, and hiring help is the smart choice.
You’re going to need to substantiate your tax deductions when you get an audit. Do you have all the paperwork, going back seven years related to what you wrote off? If not, start getting it together immediately. If you rely on electronic records, that's fine. But you might want to print everything out. Doing so tends to feel a little mor real. Plus you might find that your bank only allows you to download records from the last few months, so it can take some time to gather everything you need. (Pro tip: you might want to print out your bank statements regularly to keep them on file—not every electronic source is as diligent as Kashoo is about recording every accounting task you ever execute!) If you don’t have records to back up all of your deductions, don’t worry—you can use third party verification methods. Your tax professional can offer support in this area.
Be Courteous (But Don’t Say Too Much)
Sure, it can feel like you’re being picked on when you get that audit notice, but it’s not personal. The IRS uses computer scoring to determine who gets audited, and this time it’s you. When you deal with IRS agents in your auditing process, remember to be polite and friendly at all times. (It's amazing how much that will work in your favor!) But also remember to only answer the question you're being asked.
Here's the bottom line: you will get through an audit. It can be a long and slow process, but you and your business will survive. Of course, the best way to handle a tax audit is to try to avoid one in the first place, but sometimes your number just comes up. With professional help, patience, and time, soon the audit will be an amusing memory. Well, maybe not amusing, but a memory nonetheless.